Today’s Blog – Thursday 11th June 2015

A slightly shorter (and later) blog today. News from the ASX is pretty thin, other than the likes of a couple of 3Bs, 3Xs, etc.

Commodity prices

Crude prices continued their rally over-night, with Brent closing at US$65.70 and WTI at US$61.43. The key support was bullish numbers from the US’s weekly inventory report, with a considerably larger-than-consensus-view draw of 6.8 mmbbls. Furthermore, there was a decent draw on the product side as well, with gasoline inventories falling – by 2.9 mmbbls.

On the “events” side of the Atlantic, there are growing fears about IS making moves on Libyan oil infrastructure.

Stlll moving East, and this side on the bearish side of oil markets, this week has (supposedly) seen the start of an Iran/Russia “swap” deal – whereby Iran will deliver crude to Russia (the world’s largest oil producer) and in return receive goods (ranging from teddy bears to advanced missile systems, with the weighting likely to be on the latter).

This is clearly just a “sanctions washing” exercise and its efficacy remains to be seen. If it works, it could bring on another 0.5 mmbopd of supply, which would be very material in the current market.

Henry Hub closed up slightly at US$2.89.

LNG

A report issued by Wood Mackenzie yesterday produced some pretty bearish numbers on Chinese gas demand, current and projected. This seems to be of a piece with recent Chinese data on electricity demand growth – which is running at much less than headline GDP growth. Is the latter over-stated is therefore an obvious question to be begged.

In the short and medium terms, it seems unlikely that a PRC that in WoodMack’s view is long gas will contract for much new LNG supplies (unless on very favourable terms).

Government news

Following on from yesterday’s blog, Exxon has denied any linkage between the disposal of frack water and increased seismic incidents. I wonder what Mandy Rice-Davies would say about that?

Company news – InterOil Inc

US listed, but PNG invested, InterOil has recently made some bullish comments about how its PNG based LNG project has the lowest cost gas in the Pacific region – and is markedly cheaper than Australian rivals. Given the very high flow rates that have been achieved from its on-shore Elk-Antelope field, that seems likely to be true from an upstream perspective. It is however a different question as to whether other LNG developers could undertake a PNG based liquefaction project as cost efficiently as XOM.

Possibly more relevant than Australian competitors is how does this project compare – in the long term – to US shale gas sourced projects.

Company news – Origin Energy Ltd (ORG)

As noted yesterday, ORG put out a detailed strategy presentation on its downstream business. Inter alia, this brought out a key issue facing gas suppliers – an absolute fall in demand for electricity and gas – and renewables gaining a market share of at least 30% (with ORG’s Grant King saying that solar is likely to surprise on the upside).

If Australia’s mature economy experience is repeated globally, then expectations for future LNG demand are likely to be over-stated.

Quotes of the day

Recent media stories have emerged about a typical example of current oil company cost cutting – BP’s cancellation of bowls of free fruit for employees at its Sunbury (UK) base.

Fruit was also cut at Sunbury back in 2008 – leading at that time to the following rather different quotes in the UK press:

Company spokesman: “This is part of the general belt-tightening at BP. It is all about simplifying things, cost-cutting and making things run more smoothly.”

An employee: “This is just petty, penny-pinching by our over-paid bosses. They’d rather take away their staff’s only perk then look at their own overinflated wages.“